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Federal Reserve Bank of Chicago

Where the Headquarters are ? Evidence from Large Public Companies 1990-2000

Tyler Diacon and Thomas H. Klier

WP 2003-35

Where the headquarters are ? Evidence from large public companies 1990-2000

Tyler Diacon Marakon Associates

Thomas H. Klier Federal Reserve Bank of Chicago

Abstract This paper examines the location of headquarter growth of large public companies during the 1990s. Headquarters continue to be attracted by large metropolitan areas. Yet among that group they continue to disperse into medium-sized centers. This paper identifies 6 different categories of gross flows underlying the net change of headquarters observed during the 90s. There is strong variation among the 50 largest metro areas in terms of the composition of these gross flows. On average, entry and exit represent over 2/3 of all gross flow activity. Pure relocation of headquarters is found to lead to urbanization. Mergers tend to not impact the distributing of headquarters across MSAs. A binomial probability model of the decision to move utilizes company-level as well as MSA-level data and finds that MSA-level amenities impact the choice to move.

JEL codes: R 12, R 30, L 20 Key words: Headquarter location, MSA amenities, gross flows

________________________________________ The authors would like to thank Ethan Lewis, Dan McMillen, and Bill Testa for helpful comments and Alexei Zelenev for excellent research assistance.

Motivation

The growth and locational patterns of large corporate headquarters have been a subject of research dating back to the latter half of the twentieth century (see Lichtenberg, 1960, Evans, 1973, and Quante, 1976, for a synopsis of earlier work). Ross (1987) compares corporate headquarter location between 1955 and 1977. Studies using more recent data to track the distribution of headquarters over time tend to rely on Fortune 500 data. Horst and Koropeckyi (2000) and Holloway and Wheeler (1991) base their timeseries analysis on data for Fortune 500 companies. Holloway and Wheeler (1991) conduct their empirical analysis for the 1980s using annual data for that decade. Horst and Koropeckyi (2000) utilize the same data from 1975 through 1999 (in five-year intervals). A set of different papers analyzes larger data sets but only utilizes their crosssectional information. Shilton and Stanley (1999) draw on data for all publicly traded companies, regardless of company size, and Davis (2000) draws on data from the Census Survey of Auxiliary Establishments. Klier and Testa (2002) combine these two aspects of the literature and present information on a panel of all large publicly traded companies they tracked for the 1990s.

A common finding in all these papers is the high degree of concentration among headquarters. For example, Shilton and Stanley (1999) report that 40 percent of their sample is located in only 20 U.S. counties. They explain this stylized fact by the comparative advantage of cities to support headquarters operations. In fact, Horst and Koropeckyi (2000) report a strengthening of that effect during the 1990s as evidenced by a substantial drop of Fortune 500 headquarters located in non-metropolitan counties. In addition, the advantage of certain cities in hosting headquarters operations seems to depend little on the historic and perhaps serendipitous presence of individual companies. For example, despite Boston's ongoing strength as a domicile of Fortune 500 companies headquarters, only two of the 15 present in 1999 had been there since 1975 (Horst and Koropeckyi, 2000).

At the same time, headquarter concentration continues to be shifting toward metro areas that do not rank at the top of the size distribution. In 1955, the first year the Fortune 500 list was compiled, the New York metro area was home to 31 percent of all company

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headquarters on the list, the vast majority of which were located right in the city (28 percent of all Fortune 500 headquarters). While the metro area share of national headquarters remained stable until the early 1970s, the city began to lose headquarters to its surrounding areas in the mid-1960s. For the last 30 years, the share of headquarters domiciled in the New York metro area has been steadily declining. By 1999, it had fallen to 10 percent of Fortune 500 companies (see Quante, 1976, and Horst and Koropeckyi, 2000). Ross (1987) finds the biggest gains not among the largest cities but among other large cities that often experience rapid population growth during the same time period. Holloway and Wheeler (1991) find that "in many ways the changes experienced during the 1980s in location of major corporate headquarters and the assets they control were not qualitatively different from those experienced earlier. New York continued its decline for a third decade and...the chief beneficiaries were other large centers that had large enough infrastructures to be attractive as corporate headquarters locations." (p.72) In their analysis of gross flows of headquarters they find that mergers and acquisitions, as opposed to direct relocations, are a direct mechanism leading to the deconcentration of headquarters. Klier and Testa (2002) and Klier (2002) analyze a more broadly defined set of observations and find the long-term trend of deconcentration of headquarters to have continued during the 90s.

A second strand in the literature asks what city characteristics are associated with the location of headquarters. Utilizing Census microdata Davis and Henderson (2003) estimate a poisson model of the location pattern of firm births. The underlying presumption is that firms choose locations in order to maximize profit. The authors report evidence of headquarter agglomeration, specifically, positive effects both for the diversity of local service inputs as well as the scale of other headquarters nearby. Lovely and Rosenthal (2003) find evidence of agglomeration among companies that export to foreign markets. Headquarter activities of exporters are more spatially concentrated when information on the foreign market is difficult to obtain.

This paper presents detailed information on the gross flows of headquarters of large publicly traded companies during the 90s. It investigates the effects of pure relocations and mergers and acquisitions on the distribution of headquarters among metropolitan areas. Furthermore, it estimates both a metropolitan area level model of

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gross flows as well as a company-level probit model of the probability to move. A number of city-level characteristics as well as company-level control variables are found to significantly influence the location choice of headquarters during the 1990s.

Data

Information on the location and characteristics of companies comes from Compustat data on publicly traded companies for the year 1990 and 2000. The data represent a panel of all public companies whose shares are traded in the U.S., with the exception of American Depositary Receipts (ADRs), closed-end mutual fund index shares, and pre-Financial Accounting Standards Boards (FASB) companies.1 Active companies are either publicly traded companies or are required to file with the Securities and Exchange Commission.

The database identifies a company's headquarter location, its total employment, and assets, both total assets as well as assets held abroad. In addition, by way of Compustat's "mergertracker" data, we obtained detailed records on individual corporate actions such as mergers, companies going private, companies entering bankruptcy etc.2 This information will be very useful in identifying detailed gross flows of headquarters (see below).

This paper focuses on the location of large company headquarters, where large is defined as total worldwide employment of at least 2,500. Headquarter locations are aggregated by metropolitan areas. Specifically, the paper uses the most extensive definition of metropolitan areas, the so-called consolidated metropolitan statistical area (CMSA).3 Thus, the results are not affected by relocations of headquarters from a central city to a suburban location within the same metropolitan area. The underlying assumption is that a metropolitan area's different locales share common attributes relevant to the siting of a headquarter. Some important attributes include hub airports, access to business service firms, and a common skilled labor pool.

1 Compustat created "pre-FASB" company records upon introduction of FASB rule 94 regarding the accounting of financial service subsidiaries to show consistency between current and historical data. 2 About 80% of corporate actions identified in the data are mergers.

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